The German (and British) competitiveness dogma (part III)

For those who still do not fully grasp what all the fuss about competitiveness is all about, Germany’s chancellor Merkel and British premier Cameron made it abundantly clear in Davos: It’s about lowering labor costs, liberalizing labor markets (i.e. reducing workers’ protections), and cutting social spending. Merkel even admitted that the implementation of such ‘structural reforms’ against popular opposition will only be successful under pressure (see Frankfurter Allgemeine of January 25, 2013: "Merkel: Wir brauchen Druck für mehr Wettbewerbsfähigkeit.") In Milton Friedman’s words: “Only a crisis – actual or perceived – produces real change” (Capitalism and Freedom) --->see my post on “The role of crises for Troika shock therapy” and the highly recommended documentary "The Shock Doctrine".

So, as pre-exercized in Southern Europe, a crisis is conjured up to justify far-reaching labor market reforms and other structural competitiveness measures in the rest of the eurozone as the price for Britain’s stay in the European Union (the following passages are cited from David Cameron's speech at Bloomberg in London):

“There is a crisis of European competitiveness as other nations in the world soar ahead…Europe’s share of world output is projected to fall by almost a third in the next two decades. This is the competitiveness challenge and much of our weakness in meeting it is, frankly, self-inflicted….[through] complex rules which restrict our labor markets"…and “excessive regulation”...“As chancellor Merkel has said, “if Europe today accounts for about 7% of the world’s population and produces 25% of its GDP, it is currently financing 50% of global social spending. And then it’s obvious that it will have to work very very hard to maintain its prosperity and its way of life.”…..More of the same will not see the EU keeping pace with the new economic powerhouses of the world…More of the same will just produce more of the same: less competitiveness, less growth, fewer jobs….That is why we need fundamental, far-reaching change.”

Apart from the fact that this kind of rhetoric sounds eerily familiar to the arguments that promoted financial market liberalization before the Great Financial Crisis, Cameron seems to view the favorable economic development of emerging nations as a zero-sum game leading to a “global race of nations”… “for the wealth and for the jobs of the future": "Europe is being outcompetet, out-investet, out-innovated and it is time we made the European Union an engine for growth, not a source of cost for business"...."You ought to deal with your debts, you ought to cut business taxes, you ought to tackle the bloat in welfare...." (see Cameron's speech in Davos, lecturing EU policymakers). "Now, back in the UK, we've been doing all of this."

Oh, really, Mr. Cameron ? And what are the results ? Let's have a reality check:  In Q4/2012, "UK GDP fell by a shocking 0,3%, which means that the UK is back in recession,".... unemployment is rising, the trade balance is deep in the red ..."and productivity seems to have collapsed". The explanation for the dismal economic performance is that the UK is following the wrong policy mix: "trying to aggressively tighten fiscal policy at the same time as persistently pressurizing UK banks to raise large amounts of capital is just the wrong thing to do." (Jim O'Neill, Chairman of Goldman Sachs Global Asset Management)

To sum up: the UK's economy is far from being the shining light in Europe - it rarely (if ever) has been. Why should Europe's policymakers follow an economic model which obviously is not working ?  

Yet, to the ears of Europe’s competitiveness queen Angela Merkel, Cameron’s words sound like music. She immediately endorsed his demands that Europe improve its competitiveness and proposed a second pact (in addition to the fiscal pact) for EU member states, committing themselves to structural competitiveness reforms where needed. See an excellent assessment of Merkel's new plan here: Merkel's Agenda des Schreckens.

With friends like that, Europeans don’t need any enemies !

Fortunately, there were also very positive developments at Davos.  Please check my next post for a report on those.